Getting a Condo Mortgage: Here’s What You Should Know

Buying a condo can be more convoluted than buying a single-family home, as you’re purchasing a piece of a community that has a unique set of rules and fees. The condo mortgage process can also get complicated — your lender will consider both your finances and the finances of the condominium community.

What is a condo?

A condominium (“condo” for short) is a privately owned unit within a larger building that also houses other units. Condos are usually managed by a condominium association, which is responsible for maintaining, repairing, replacing and managing common areas like hallways, garages and recreation facilities. The association also has the power to adopt and enforce guidelines for the members’ use of those common areas and typically requires residents to pay monthly or yearly dues.

Condo vs. apartment

The main difference between condos and apartments isn’t in the structures themselves but in the way they’re owned. Apartment buildings are often owned by a single entity, like a real estate developer or real estate investment trust (REIT), and rented to tenants.

A condo, on the other hand, is a single unit of a larger building and is usually owned by an individual. Owning a condo also builds equity, while renting an apartment doesn’t. Otherwise, condo communities and apartment complexes offer similar amenities.

Things You Should Know

When people talk about buying an apartment, they usually mean purchasing a unit in a co-op project. Co-ops (short for “cooperatives”) allow you to live in an apartment or unit you choose, but you don’t actually own that specific unit. Instead, you own a share in the co-op as a whole, which is actually a corporation.

Condo vs. house

Unlike owning a condo, owning a home typically allows you to do anything you want to do with and in your own home, as long as it’s legal. For example, you can usually remodel as you see fit (as long as you get the proper permits, of course). Condominium associations, on the other hand, can limit the type of remodeling you’re allowed to do, prevent you from renting out your unit or even restrict what kind of pets you own. A condo also has less privacy than a house, since you’re sharing the building with other units.

Condo prices tend to be lower than home prices, however — according to the National Association of Realtors (NAR), the median condo or co-op sales price was $337,300 in March 2023, while a median single-family home was $436,800.

Condos as vacation homes

A condo can be a vacation home and may offer amenities, like a swimming pool or tennis courts, that can make it a convenient place to relax and recreate. However, if you’re hoping to make some extra money by renting out your condo as a vacation rental, be sure to do your research first. Not all condominium associations allow homeowners to use their condo as a vacation rental, and those that do may not be as easy to finance.

How does a condo mortgage work?

You can use the same loan programs for condos that you’d use to buy a single-family house. However, there are some key differences in how lenders look at the two types of properties during the underwriting process.

In addition to vetting your finances, mortgage lenders also evaluate the condo association’s financial health. The lenders will assess the entire picture of how the condo project is built, run and owned including the following:

• Number of units purchased
• Number of units owned by investors (non-owner-occupied)
• Amenities
• Lawsuits that involve the condo association
• Number of unit owners delinquent on dues
• Deferred and upcoming special assessments

These are the sorts of factors that make a condo either warrantable or non-warrantable, and most mortgages require that your condo be warrantable.

Pros and cons of owning a condo

What is a warrantable vs. non-warrantable condo?

A warrantable condo is one that’s eligible for a conventional loan, by virtue of following rules set out by Fannie Mae and Freddie Mac to ensure that mortgages issued for condos are a reasonable risk — both for lenders and for buyers. A non-warrantable condo doesn’t follow Fannie and Freddie’s rules, which means that you can’t use conventional financing to buy it.

A non-warrantable condominium might have 20% or more units owned by one entity, an HOA involved in unresolved litigation or mandatory membership fees for amenities that aren’t owned by the homeowners association. Financing a non-warrantable condo will likely be more difficult, as you won’t be able to access the low-down-payment options offered by some traditional mortgage programs and you’ll be limited to a smaller pool of potential lenders.

Tip

To find out if a specific condo you’re interested in is warrantable, check to see if it shows up on approved lists, like those published by the U.S. Department of Housing and Urban Development (HUD) or U.S. Department of Veterans Affairs (VA).

To navigate the complexity of these rules and guidelines, you’ll likely want to find a lender with experience in offering condo mortgages.

Types of condo mortgages

There are several condo mortgage options available.

→  Conventional loans: These loans offer financing for condominiums with only 3% down, a minimum 620 credit score and cancelable private mortgage insurance (PMI), so you don’t have to put 20% down when buying a condo. However, they use guidelines set by government-sponsored entities Fannie Mae and Freddie Mac, which means that your condo has to be warrantable.

→  FHA loans: You’ll need a score of at least 580 to buy a condo and make the program’s minimum 3.5% down payment. Use HUD’s condominium search tool linked above to find FHA-approved condos or look up a specific condo you’re interested in.

→  VA loans: Active-duty military members, veterans and eligible spouses can buy a condo with a VA loan. For military borrowers, this loan program has a 0% down payment, no mortgage insurance and no loan limits, which are perks that FHA and conventional loans don’t offer. The VA also has its own VA-approved condominium list, which we’ve shared above.

→  USDA loans: The USDA offers a 0%-down-payment mortgage to low-income borrowers in rural areas to purchase a condo. There’s no minimum credit score requirement, but you’ll need to meet USDA income limits and demonstrate you can handle the monthly mortgage payments. You can check the USDA’s property eligibility tool to find out which condos near you might qualify for.

What to know about condo mortgage rates

Condo mortgages tend to have higher interest rates than loans for single-family homes, and they’ll likely be getting even higher for many borrowers. That’s because Fannie Mae and Freddie Mac view condos as a riskier bet and, to compensate, they charge the lender an extra fee if you’re buying a condo and your loan-to-value (LTV) ratio is over a certain limit. Under the old rules, your LTV had to exceed 75% to trigger the fee — however, as of May 1, 2023 the cutoff will be 60%. Lenders pass this fee on to you by charging slightly higher interest rates.

Luckily, you can negotiate your mortgage rate with your lender and, the larger the down payment you’re able to bring to the closing table, the less you’ll pay in extra fees or interest rate hikes.

If you’re purchasing a condo as a second home or investment property, though, you can also expect to see higher interest rates due to fees charged by Fannie and Freddie. These fees range from 1.125% to 4.125% of your loan amount, depending on your LTV.

5 tips for buying a condo

While buying a condo can be complicated, you can take several steps to make the process as smooth as possible.

Hire real estate professionals

Consider hiring a real estate agent and real estate attorney experienced with the condo searching and buying process. They can guide you through the condo association documents, including the association bylaws, recent regulations and budget, to help uncover any issues that may negatively impact your lifestyle.

Research the condo association

In addition to working with a knowledgeable real estate professional, you should do your own digging into the association management company. Find out if the condo association has been involved in any lawsuits or experienced frequent delinquencies. You should also meet the association president, board members and current residents if you’re able.

Ask about special assessments

A special assessment is a charge that the condo association can impose at any time if the existing budget isn’t enough to cover an important expense (an expensive roof repair, for example). By asking about current and upcoming special assessments, you can understand what additional costs you might face if you buy a condo.

Evaluate the amenities

While amenities like a clubhouse and swimming pool are nice, you should make sure they’re amenities worth the price tag. Comparing amenities might help you narrow down your search. Mortgage lenders will also want to know what amenities the condo community will have when making their evaluation.

Understand the rules about rentals

If you’re hoping to make passive income with vacation rentals through platforms like Airbnb, you should check with the condo association first. Some associations may have rules about whether you can lease your condo.

Understand the full costs of owning a condo

To know if buying a condo is worth it, you should evaluate all of the costs. Not only do you need to consider the principal and interest portion of your mortgage payments, you’ll also have condo insurance, association dues, property taxes and mortgage insurance (if applicable) to factor into your costs.

Potential monthly condo ownership costs

The following example represents a 30-year mortgage on a $300,000 condo with a 6.62% interest rate and 10% down payment. Comparing these costs to that of buying a house might give you a clearer picture of whether buying a condo is worth it.

Example: monthly condo ownership costs